USD/PKR rate equal to 175.55 at 2021-12-03. Based on future forecasts, a long-term increase is expected, the Forex rate forecast for 2026-11-14 will be 214.249. Widening trade deficit and increasing pressure of funds borrowed from the World Bank, the IMF and rise of imports are some of the main reasons why the US dollar is gaining strength against Pakistani rupee day by day. In the financial year 2018, Pakistan’s trade deficit had reached an all-time high of USD 37.7bn.
But it later recorded a drop to USD 31.8bn in FY19 and USD 23.183bn in FY20. Later, the country’s current account deficit has already turned red, as trade deficit is continuously ballooning for the last few months. The World Bank has also approved a loan of USD 800 million to cash-strapped Pakistan. During the last fiscal (2020-21) trade deficit stood at $31.1 billion, 34.3 percent more than $23.159 billion recorded in FY2019-20.
The IMF approved the disbursement of US$1.386 billion under the Rapid Financing Instrument to address the economic impact of the Covid-19 shock. Pakistan’s exports posted a 17.5 percent growth in October, rising to $2.471 billion as compared to $2.104 billion in Oct 2020. This is the highest-ever export in any October in our history.
A ratio comparing export prices to import prices, the terms of trade is related to current accounts and balance of payments. If the price of exports rises by a smaller rate than that of its imports, the currency’s value will decrease in relation to its trading partners. If imports continue to rise, domestic dollar reserves will further fall, subsequently pushing the dollar rate up. Pakistan had sufficient dollar reserves for paying the import bills over the next three months but it also needed to take steps to curb imports of luxury goods.
The IMF’s program has also been suspended for the past six months. If the IMF program resumes, there will be some improvement in exchange rates. Pakistan’s imports are increasing rapidly because of which pressure on the dollar is increasing and the rupee is depreciating. An increase in trade deficit could also be a reason behind increase in dollar value.
Factors that affect currency value are such as countries with higher interest rate may cause demand of the currency growing and hence value may rise. Pakistani currency is facing high interest rate challenge causing low valuation. High inflation causes loss of purchasing power for currency and hence its value depreciation. Pakistan has very high inflation in tune of 15-30%, which can easily devalue the currency proportionally.
Large amounts of capital outflow in Pakistani rupee terms are required to buy dollars, which is critical for paying foreign debt that is mostly dollar denominated debt. Every country is valued based on its net worth and money represents the unit of worth. Countries with low/no real money tent to print more and more currency, however printing currency just gives illusion of money, but they actually reduce value of currency.
Some countries may decide to use a fixed exchange rate that will not fluctuate intraday and may be reset on particular dates known as revaluation dates. Governments of emerging market countries (usually with distress) often use this to stabilize the value of currency (Like Pakistan is trying to do), however, the government of Pakistan will be required to hold large reserves of the pegged currency (Like USD for Pakistan) and control changes in supply and demand.
This is the reason, Pakistan has borrowed money from Saudi Arabia, which they will use for reserves but cannot use. Speculating on this issue, that it is possible that Pakistan and IMF have reached an agreement and international agencies might have asked Pakistani authorities to devalue rupee more.
The United States had frozen several Afghan bank accounts since the Taliban took over Afghanistan leading to large-scale smuggling of dollars from Pakistan to Afghanistan. The price of dollar is constantly rising in Afghanistan and people are buying dollars from Pakistan and selling them in Afghanistan to earn a huge profit. For 2022, now expects an average rate of 180 (may be more 180) versus a previous forecast of 165.
Pakistan’s stock exchange also fell nearly 3% on fears that a bill moved in the U.S. Senate seeking to impose sanctions on Taliban that could potentially extend to Pakistan. Over the long term, tightening U.S. monetary policy alongside higher structural inflation relative to the United States would weaken the rupee against the dollar. Pakistan and China have agreed to trade in their local currencies: Rupee and Yuan. Both of these countries have plans to abandon using the US dollar while trading with each other.
The use of local currencies is expected to provide some sort of relief to economic woes in the region of South Asia. We have developed a habit of giving preference to imported products over local products. With the dollar price in Pakistan going above PKR 180, every imported item available in Pakistan is getting expensive gradually and steadily. Therefore, buying a Pakistani product is a more economically viable option for citizens right now as it will be beneficial for the country in the long run.
Overseas Pakistanis can play an important role in helping the struggling economy of Pakistan via remittances, which acts as a catalyst for financial markets in the case of developing countries like Pakistan. Pakistan had another year of record remittances with growth at 26 percent and levels reaching $33 billion in 2021. In addition to the common drivers, the government’s Pakistan Remittance Initiative to support transmission through formal channels attracted large inflows.
Stocking US dollar for profits remains a conundrum; in fact, it’s one that presents a religious challenge for many in Pakistan, which is a Muslim-majority country. Meanwhile, there are some who believe instead of stocking up on dollars, people should convert US dollars into Pakistani rupees, which can be used to support local industries. Also, boost agricultural industry because Pakistan is an agricultural country.
We may boost agricultural products such as sugar, maize, wheat, vegetables and fruits to export to other countries to overcome value of Rupees against Dollars. Pakistani government also introduces their labor force in various industries within Pakistan and outside Pakistan to boost Pakistani economy.
